Page last updated at 11:56 GMT, Monday, 21 April 2008 12:56 UK

Power struggles loom in Paraguay

By Robert Plummer
Business reporter, BBC News

After 61 years of Colorado Party rule, Paraguay is the second-poorest country in South America. What chance is there of a fresh start under the new President-elect, former Roman Catholic bishop Fernando Lugo?

Fernando Lugo celebrating victory
But what happens when the euphoria wears off?

It's easy to see why Paraguay's six million inhabitants have grown so discontented at the country's economic plight.

One of the minnows of the Mercosur trading bloc, landlocked Paraguay is squeezed between its bigger, richer neighbours, Brazil and Argentina.

The official economy is heavily dependent on agricultural exports and revenue from the Itaipu hydro-electric power plant that it jointly owns with Brazil.

Itaipu featured prominently in Mr Lugo's election campaign, in an indication that the former bishop might be drawing his inspiration from the only South American nation poorer than Paraguay - the equally landlocked Bolivia.

Bolivia's President, Evo Morales, decided to make energy-hungry Brazil stump up an extra $100m a year for the natural gas supplies it needs from his country.

South America's second-poorest nation
Gross national income per head: $1,410 (World Bank, 2006)
GDP: $9.3bn (World Bank, 2006)
Foreign debt: 3.69% of gross national income (World Bank, 2006)

Now Mr Lugo is showing signs of the same economic nationalism, calling for an end to contractual obligations that require Paraguay to sell its unused electricity to Brazil at well below the market rate.

The Itaipu deal is a product of South America's shadowy authoritarian past. It was signed in 1973, at a time when both Brazil and Paraguay were ruled by military governments. Paraguayan auditors have never been allowed to see the company books.

Mr Lugo clearly feels it is time to shed some democratic light on this murky project. Denouncing Brazil's "economic colonialism", he has vowed to take his case to the International Court of Justice if necessary.

Argentina has good reason to be worried too, as it has its own Yacyreta hydro-electric joint venture with Paraguay which also has its roots in the military past - and which was described as "a monument to corruption" by former Argentine President Carlos Menem.

Smugglers' haven

But where Paraguay is concerned, the official economy is only one part of the story.

There is certainly little sign of frenzied economic activity in the main city, Asuncion, which ranks as one of the sleepiest capitals in South America.

Paraguayan fruit vendor in Asuncion
Street vendors sell all kinds of food in Asuncion

Street vendors selling traditional "chipa" corn bread and "terere" cold herbal tea are a reminder of the strong indigenous Guarani base of the population.

At night, however, they are replaced by teenage prostitutes who cheerfully attempt to accost unwary foreigners.

Asuncion undoubtedly has its seedy side. But even so, it is certainly a far more clean-living and dignified place than the vast swarming souk that is Paraguay's second city.

Ciudad del Este, on the eastern border with Brazil and Argentina, is full of chaotic markets and down-at-heel shopping arcades that thrive on what economists call the "informal import and re-export of goods" - smuggling, to you and me.

Counterfeit CDs and DVDs, fake designer clothing and perfumes, electronic gadgets - all these are bought and sold cheaply and in huge quantities, with the keenest customers being Brazilians and Argentines buying items to re-sell on the streets of their native countries.

If you stroll into the lobby of any cheap hotel in the city in the middle of the afternoon, you will find it teeming with shoppers waiting for their chartered bus to take them back across the border, every one of them carrying a bulging "sacola" or large canvas bag crammed with booty.

Guns and drugs

Not all economic activity in the tri-border area, as it is known, is as benign as that.

Drug-trafficking and gun-running are also associated with the region. Another Paraguayan border town, Pedro Juan Caballero, first made Brazilian headlines in the 1990s because shops there were ordering large numbers of guns from Brazilian manufacturers.

Cache of guns seized by Paraguayan officials in Pedro Juan Caballero, September 2006
Guns seized in Paraguay were destined for criminal gangs in Sao Paulo

These guns, often models that were not authorised for sale in Brazil itself, were then being bought by criminal gangs and re-imported to Brazil.

This trade has now been closed down by the Paraguayan authorities, following the discovery of a big arms cache in the town in 2006.

There have also been persistent allegations from the US authorities that Lebanese businessmen based in the region are responsible for channelling large sums of money to armed groups in the Middle East such as Hezbollah.

In short, Paraguay's economy is closely linked to those of its neighbours, but not necessarily in a good way.

Mr Lugo has already met Brazil's President Luiz Inacio Lula da Silva and has dropped hints that he sees him as a potential role model.

In this rosy scenario, Lula might be persuaded to grant Paraguay some leeway on the Itaipu deal.

The extra cash in the country's coffers would then allow Mr Lugo to launch a local equivalent of the Bolsa Familia and other social programmes that have helped to lift millions of Brazilians out of poverty.

Alternatively, the relationship could easily turn sour - bringing a swift end to Paraguay's hopes of a brighter future.

Print Sponsor

Opposition victorious in Paraguay
21 Apr 08 |  Americas
In pictures: Paraguay elections
21 Apr 08 |  In Pictures
Paraguayans vote in key elections
20 Apr 08 |  Americas
Profile: Fernando Lugo
21 Apr 08 |  Americas
Final rally for Paraguay hopefuls
19 Apr 08 |  Americas
Country profile: Paraguay
19 Apr 08 |  Country profiles

The BBC is not responsible for the content of external internet sites

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific